Where do we go from here?

Buying homes in the UK and in particular London, has been part of the diversification investment strategy for wealthy Asians for the last three decades. Having a home in the UK,  is their offshore ‘store of value’. Until recently not only was it a good investment which enriched their lives, but was also tax free.

Families could simply invest through an offshore company and then forget about stamp duty, capital gains tax and inheritance tax. This has now all changed thanks to George Osborne.

Many foreign home owners are confused. They need to know that just as it was possible to avoid taxes through foreign company ownership there are other ways in which tax can be mitigated.

Lee is a typical Asian living in Singapore, he has a daughter in Wycomb Abbey and a son at Cambridge University. He owns a home in Knightsbridge where he and his children stay when in the country and not at school or uni. Their home is owned through a Jersey trust and company structure, on which Lee has been paying the annual tax on enveloped dwellings which for last year was £54,450. Their children are resident in the UK and are beneficiaries of a trust which is also based in Jersey. The cost of running two trusts offshore is in excess of £16,000.

Lee’s first priority are the taxes on his home; the annual payment of ATED, capital gains tax on a sale at 20% and ultimately inheritance tax at 40% on death, the second priority is that he and his wife do not want to give large sums of money to their children at such a young age.

Oddly enough tax planning should be first and foremost about life decisions – not tax. Living in the Bahamas may be a great way to save taxes, but if you do not want to live there – don’t do it! This means that planning around personal priorities should not be embarked upon by an enthusiastic amateur.

To take Lee’s Knightsbridge home out of the company structure would, I pointed out, trigger a capital gains tax charge. However, it would be levied only on any gain made since 2015 and at a rate of 20%. So this would not too onerous a cost.

Lee and his wife would then need to put in place some precautionary measures to mitigate inheritance tax. They are both in their fifties and in good health, so what they needed was precautionary measures should Lee die unexpectedly – not a full blown succession plan.

For Lee it made sense for him to draw up a Will leaving his Knightsbridge home in a Will Trust for his wife for life and thereafter for their children. Given that both she and Lee are non UK domiciled, this transfer would be tax exempt. Lee’s wife could then decide whether to keep or sell the home. If she decided to sell it, she could then take the proceeds out of the UK and the value would then immediately be outside the scope of Inheritance Tax on her subsequent death or gift to the children. 

With regard to the trust for the children, I asked whether the children were paying UK tax on the income and capital gains tax on the distributions which they were receiving from their Jersey trust. They were, but at their lower rates of tax, so the annual tax cost was not very high. The main benefit of the trust was therefore to provide a hedge against the ten yearly inheritance tax charge at 6%.

I pointed out that if mitigation was the main benefit of the trust then there was no reason to keep it offshore. The same benefits could be achieved if the trust was repatriated to the UK by appointing UK trustees.

Lee was delighted putting in place a few simple precautionary measures which did not take him long to understood, he felt much more in control, he could retain his UK investments and continue to enjoy them.

Tax should never be the tail which wags the dog. People like Lee can always find ways to mitigate tax, and because the timing of death is not predictable estate planning is not considered by the government as aggressive tax avoidance.

If you would like to book an appointment with Caroline who is a Fellow of the Chartered Institute of Taxation or meet with any of her team for dispute resolution, matrimonial or family business concerns contact svetlana@garnhamfos.com or call 020 3740 742.

Proud to be British

Last week George Osborne, Chancellor of the Exchequer predicted that Brexit could cost the UK £200 billion in lost trade and a further £200 billion in foreign investment within 15 years. Does anyone believe him?

The outlandish announcements started with the Prime Minister stating that he had secured ‘fundamental reforms’ in the EU which meant he could now confidently put his weight behind the decision to remain in the EU. But the British people know that the EU is not set to change despite the claims of our Prime Minister to the contrary.

The polls regardless of the barrage of lies and half-truths have not budged. The British people are not stupid; recent attempts by the Prime Minister and his Chancellor to pull the wool over our eyes are not working.

There are many people in this country proud to be British. Our little rain swept island has created more jobs than all the other European countries put together and we are now the fifth largest economy in the world. Why do we need to believe politicians who say we cannot go it alone – we can, but do we have the politicians we need with the innovation and guts to make a success of it?

We need to look at how countries outside the EU have fared and take a leaf out of their book. Switzerland, for example is outside the EU and yet it has twice the GDP per capita than we have in this country. Can we take some of its policies and adapt them to our country.

First we could change our attitude towards the wealthy who are keen to live and buy homes in the UK. Rather than encouraging them to leave their wealth offshore we should legislate to incentivize them to bring wealth into the UK. This could be achieved very simply by introducing an exemption from UK tax for all monies brought into the UK which are invested or managed in the UK.

This exemption could then be extended such that any monies, which were brought into the UK but not managed or invested should be charged to income tax – regardless of source. This would wipe out a lot of wasted time and effort in trying to work out the source of funds and the correct amount of tax payable. It would also be much fairer; taxing monies which are spent in the UK.

In line with this thinking, I would extend the exemption of the excluded property settlements to trusts with UK trustees which are managed or invested in the UK. The UK is the founder of the trust, and we should do what we can to make sure we capitalise on our creation rather than provide opportunities for offshore financial centres such as the Bahamas, Jersey and Cayman Islands to thrive. In this way excluded property trusts would be much more transparent to everyone, would create jobs for our trained and skilled professional members and bring more monies into the UK to be managed. All disputes affecting such trusts would also have access to our UK court system and skilled lawyers.

The government could further encourage wealthy foreigners as well as those who are already living in the UK to bring monies into the UK by introducing an amnesty for all non doms who are concerned that inadvertently they have not declared all monies which are offshore but the source of the funds is uncertain (but not illegal). This would be particularly attractive in the buildup to the Common Reporting Standard in 2017 when taxpayers would prefer to locate their wealth to a jurisdiction where the administration and compliance rules are well understood and properly applied.

George Osborne talks about the house price crash if we were to leave the EU, and yet ironically he has done everything possible to freeze the housing market and drive down prices. He has ratcheted Stamp Duty Land Tax to 12% (15% for second homes), which has not only sent the tax take spiraling downwards, stalled the upper end of the market, but has also had a profound impact on the industries which serve these homes; architects, builders, interior decorators, estate agents, surveyors and many more.

What the country will decide on the 23rd June, I have no idea, but I am concerned on two counts. First, if the country votes marginally to stay in, the uncertainty about the future of the European Union will remain, second if we vote to go out, do we have the political innovation in government to make going it alone the success, I think the British people are capable of. I am proud to be British, and I think we could once again be Great, but do we have the politicians in government who believe in us, and have the experience and guts to take us there?

Caroline Garnham is CEO of Garnham Family Office Services, if you would like to receive her weekly Note or book an appointment with Caroline or any of her team to discuss any concerns as to estate planning, succession, offshore trusts, dispute resolution, matrimonial or other non-investment issues write to svetlana@garnhamfos.com or call 020 3740 7423.

Not always good

Last weekend I was sitting having a cup of tea with Paul, in the weak Spring sun at the Lido café overlooking the Serpentine in Hyde Park. There is something chilling, but not unpleasant about being warm drinking a hot cup of tea, watching swimmers pound out their lengths in the freezing cold water.

Paul, before he retired was a top City capital markets lawyer and is therefore familiar with the law of trusts. More recently he has turned his skills to reviewing trusts for private clients and other related matters.

I asked, from his recent experience of private client trusts, whether they were as well drafted as trusts for commercial purposes. He said that standard forms of trust written by banks, on the whole, were well crafted, but this was not always the case for the more ‘tailored’ trusts.

This is not as surprising as it may seem. Banks do not allow Settlors to add or remove clauses. Their standard trust deeds are drafted by experts and approved by leading counsel.

However not all Settlors are prepared to accept a standard form when it comes to dealing with their world-wide wealth. Many Settlors want to set up trusts for their successors, but they do not want to lose control of their wealth, by giving their trustees too much power. They are used to getting their own way. They push their advisers into putting clauses into trusts which all but the very experienced trust professionals would find hard to resist.

The latest example, was for a family which I will call Gonzalez. They are based in South America, but have their liquid assets managed out of Switzerland. The structure was overly complex, but at the heart was a trust which reserved three powers to a ‘Protector’ which was Gonzalez, during his lifetime and thereafter his eldest child.

The first power was to decide on the investment strategy of the trust, the second was to remove and replace the trustee and the third was to determine when and to whom distributions were to be made.

I discussed these three powers with Paul. He agreed with me that to reserve powers of investment and choice of trustee is fine, but to reserve the right to decide on distributions was probably not.

Gonzalez has two sons and two daughters. His first child is a son and is the apple of his eye. He has followed his father into the family business, married well and has three beautiful children. However, his other son who is the youngest was not so well regarded by Gonzalez. He left school early to become a singer songwriter, but after a promising start had produced only a modicum of success and had slipped into a louche lifestyle of soft drugs, late night revelling and poor company. He had two children by two different mothers and Gonzalez feared he may be bisexual. His two daughters were fine, but feckless. They were both married, but to men who Gonzalez thought lazy.

On his death he wants his eldest son to step into his shoes, run the business, be the Protector of his trust and prevent his other children from inheriting any capital outright. However, it soon became clear that the three younger children would resist any arrangement whereby their older brother could decide how much or how little they were to inherit.

Under the trust document as drafted, it could be argued by the youngest three children that Gonzalez had not succeeded in creating a trust, but a nominee arrangement. If successful in this argument, his estate would pass under the laws of the country of his residence; one quarter to each child. However, it is not as simple as deciding which members of the family are right and which members are wrong. Family disputes only get resolved after months, if not years of arguing, and the longer the argument continues the more the family assets are eroded with legal fees.

Some advisers suggest to their clients that they leave the trust as drafted and set out how to resolve their concerns in a Letter of Wishes. In theory this is excellent. However, in practise, a Letter of Wishes or Family Constitution is for guidance only. Trustees keen on a quiet life are more likely to follow the path of least resistance than to ensure the Settlor’s wishes are followed.

Of course where neither party is ready or willing to compromise then the Trustee has no option but to get professionals involved. If the trust is well drafted differences can be resolved through skilled mediation, which is what we would recommend and do for a client wherever possible. Although more fees can be earned through litigation, we do not believe that litigation is the best way to resolve a family dispute. However, it is not always easy to get a family around a table and sometimes family members will only mediate if they are not made to sit in the same room as each other.

My preferred option to resolving disputes using third parties is to put in place a dynamic structure; trusts, private trustee companies and an Executive Entity where good governance principles resolve disputes rather than outside professionals. Structures which incorporate good governance principles can also meet most concerns of the Settlor without jeopardising the integrity of the structure or ignoring human nature.

If you have any comments on the above, would like Garnham FOS to review your trust structure or your family is in dispute over a trust, contact svetlana@garnhamfos.com or call 020 3740 7423 to arrange an appointment to see Caroline or any one of her team.

Toffs and prejudice

On a train to see my daughter in Edinburgh last week I was seated opposite a nanotechnology geek. As she opened the newspaper, she exclaimed ‘Good to see the right man win. We don’t want a toff as mayor of London!’

I was a little taken aback. I have had numerous brushes with the Goldsmith family over the years and her attitude was clearly prejudiced. For a woman of her education and background her strident attitude seemed odd.

I first came across the Goldsmith family through their Swiss adviser who asked me for my opinion on the removal of one of their advisers. The matter was resolved swiftly and amicably and I had no further involvement.

On this occasion I did not meet the family, but got an insight into how the wealth was structured.

I met the family many years later through my friend Tracy, the Marchioness of Worcester. Like the Goldsmiths Tracy is passionate about the environment and the quality of lives of animals bred for slaughter. She is a tireless campaigner for ‘Farms not Factories’.

Goldsmith fist became interested in wild life and our environment through the nature programmes of David Attenborough and the works of Gerald Durrell.  In 1997 he was appointed Reviews Editor of the Ecologist by Edward Goldsmith, his uncle, the magazine’s founding editor, owner and publisher. In 1998 he became Editor-in-Chief and Director of the Ecologist, but did not draw a salary.

In 2005, David Cameron approved Goldsmith’s appointment as Deputy Chairman under former Environment Secretary John Gummer of the Quality of Life Policy Group. The 600-page report prepared by himself and Gummer recommended increased taxes on short-haul flights and on highly polluting vehicles; rebates on Stamp Duty and Council Tax for people who improve the energy efficiency of their homes.

Goldsmith’s impeccable green credentials, his success as an editor and journalist are, however overlooked by many voters and journalists when reminded that he is one of the wealthiest MPs in Parliament. Sir James Goldsmith, his father,  died in 1997 with a £1.7billion fortune from which Goldsmith is estimated to have an income of £5million a year.

It is also public knowledge that Goldsmith, prior to becoming an MP had non-domiciled status and has been quoted in the Evening Standard as saying that non-dom status let individuals ‘make lifestyle choices to avoid paying tax’. Probably not a very wise thing to say, but it is true, legal and honest.

During his campaign to become mayor of London there was much criticism of Goldsmith for playing the ‘racist card’, but not a word of criticism against his opponents for playing the ‘toff’ card. No one seems to have a word of sympathy for Goldsmith who stands defenceless against the prejudice and envy for his privileged status.

Status and privilege would appear to make one ‘fair game’ for journalists who have quizzed Goldsmith about his expenses and donations. It is assumed, because of his wealth, that Goldsmith will behave in an underhand and mischievous manner. This is no less prejudice than hinting that Muslims are responsible for terrorist atrocities. It is true that some ‘toffs’ do behave in an underhand and mischievous manner, similarly some Muslims commit terrorist atrocities – but to take the example of a few and assume that all behave in such a manner is what makes prejudice so unpalatable.  

Needless to say the nanotechnology geek struck up a conversation declaring Goldsmith to be her bête noir. I moved the conversation onto nanotechnology – about which I know very little and in due course she asked me what I did.

I grasped the nettle firmly. I told her that I advised people like the Goldsmith family on estate, succession, offshore trust matters and family governance. Goldsmith I said could do little about his father’s wealth. It was in trust and the trustees have an obligation to do what his father wishes provided it is what they consider to be in the best interests of the beneficiaries. Therefore, if Goldsmith wanted to give the monies to a charity – he cannot. However, he has done what he can about his non-dom status by declaring that he is now UK domiciled.

I pointed out that in all the coverage of the Mayoral election there was little or no mention that Goldsmith had chosen to work. He was given no credit for deciding not to live a life of leisure, or for choosing to dedicate his life to make the world a better place. Goldsmith is rich; he has a choice, but this is overlooked. I do not think it is fair that the racist card is considered politically incorrect whereas it is ok to bash the rich. There needs to be much more information about what it is like to be rich; information was needed to put a stop to racial, sexual, and religious prejudice, the same is true about prejudice against the rich.

Much to my surprise, the nanotechnology geek confessed that she had never thought of rich folk as people, or that her attitude was prejudiced. I decided not ask whether our conversation had changed her opinion on Goldsmith, I did not want to get into a discussion on politics.

If you would like to comment or book an appointment with Caroline or one of her colleagues who deal with matrimonial, dispute resolution, family company issues or investment strategy please contact svetlana@garnhamfos.com or call her on 020 3740 7423.

Celebrity death ‘spike’

Allegedly there has been a celebrity death spike; Ronnie Corbett, Prince and Bowie to name but three. After the unexpected death of a celebrity there is a period of mourning; a sense of remorse that the deceased, with whom they have become so familiar, will never be seen again.

As someone who has been in the death and taxes business for most of my working career, it never ceases to surprise me how little attention is paid to the inevitability of death. My mother lived through the war in Holland surrounded by death and starvation; I asked her what it was like. Her response was ‘one never sees people die, they disappear quietly into their own homes and are just not seen again’.

We have a strange attitude towards death in our Western world. As a child I was sometimes persuaded to engage in a game of cowboys and Indians which I did not enjoy ‘bang, bang your dead’ and you were then expected to die in a realistic manner, as seen on TV. Things have not much changed. We are all immune to death. It is on the news every day, bombing and natural disasters and we enjoy it as part of our entertainment, whether fictional or documentaries. We are so exposed to it we are not aware of it. And then little Ronnie dies and we are shocked. He is supposed to laugh and pop up again – but we know he won’t.

Just as nothing prepares us for being a parent, nothing prepares us for death. Religion is of little practical help. Hell and brimstone would appear to be a human ploy to fill our churches and pay for the clergy, but it does little to inform us how to live our everyday lives, how to bring up our children or how to prepare for death

What is death even? Seemingly our body becomes ‘lifeless’, like a musical instrument which has been discarded by the musician and not required in the orchestra. We fictionalise death just as we would prefer to caricature it so that we can ignore it – until someone we know dies – such as a celebrity, friend or family relative and then we are shocked and saddened – until we can forget about it again.

Beneath the everyday veneer of an acceptance of death, in reality we are scared of it; we put off making plans superstitious that the grim reaper will come once we are ‘ready for him’. So rather than make arrangements should death pop up sooner than expected most of us prefer to put our head in the sand hoping it will go away.

Succession is an art and planning a skill. It cannot be learned from a book and must be taken very seriously. Succession is the distribution of the fruits of a lifetime to nearest and dearest, at a time when you are not there to ensure things are done properly. Your estate planner should therefore be the best money can buy; it is not something to do on the cheap.

Last week John showed me a draft of his Will. He and his wife Janet had taken local advice, but he was not convinced it was what he wanted, but could not put his finger on why.

Under the drafts prepared for them each left their estate to the survivor in trust as executor and trustee to distribute as they considered best. This is a very commendable plan for a married couple who have not been married before and do not have children by a former partner. In the case of John and Janet however, they had both been married before and both had children from former relationships. If they had executed these Wills and John had died first, Janet his wife would be able to benefit her children to the exclusion of his children from John’s estate. He was furious, that was certainly not what he wanted.

Estate planning should also take care to minimize family disputes. Josh also came to see me last week; he has a trust in Guernsey which holds many millions of pounds. Under the trust deed all three of his children were mentioned, but he was adamant that he wanted only two of his three children to benefit. However there was not power in the trust deed to remove his third child, Ben, as a beneficiary. He was fearful that following his death Ben would litigate against the trustees for a share. After some considerable discussion Josh decided that he could minimize the risk of a claim from Ben at the same time as save tax if he terminated the trust, brought the assets onshore and under his control.

Josh was so pleased. ‘The last thing I thought I would do was to terminate the trust. It had been engrained into me that it was a good for tax reasons, but as soon as I realized I could plan in other ways and be certain that Ben would not benefit I was much happier,’ he said.

If you would like to meet with me or any one of our team, whether for tax or estate planning, dispute resolution, matrimonial or investment strategy simply email svetlana@garnhamfos.com or call 0203 740 7423 to book an appointment.